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China Evergrande gets US$4.6 bil lifeline from state-linked companies

Bloomberg11/24/2020 10:32 AM GMT+08  • 5 min read
China Evergrande gets US$4.6 bil lifeline from state-linked companies
Evergrande shares fell 2% in Hong Kong. Its 8.25% 2022 dollar bond increased 2.2 US cents on the dollar to 88.3 US cents.
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China Evergrande Group took two more steps toward restoring confidence in its finances, securing a US$4.6 billion ($6.18 billion) investment from state-linked companies and lining up 23 cornerstone investors for the spinoff of its property services arm.

Companies backed by city governments in Guangdong province -- Evergrande’s home base -- will buy equity worth 30 billion yuan ($6.13 billion) from existing investors in Hengda Real Estate, a unit that holds Evergrande’s main property assets in China, a person familiar with the matter said over the weekend, asking not to be identified as the information isn’t public.

Evergrande also announced that cornerstone investors had agreed to buy a roughly 7% stake in Evergrande Property Services Group Ltd. The investors include SenseTime Group and a subsidiary of China Gas Holdings Ltd., according to terms obtained by Bloomberg News. The unit is seeking about US$2 billion in a Hong Kong initial public offering that will help Evergrande pare debt.

The deals will ease short-term liquidity strains at the world’s most-indebted developer, though concerns remain about the firm’s long-term financial health. Evergrande has been raising money through asset sales, blitz promotions, and is seeking to list its electric vehicle unit after fears of a cash crunch earlier this year sent the developer’s shares and bonds plunging.

The support from state-linked firms “marks a critical step in restoring confidence in the company’s liquidity,” said Bloomberg Intelligence analyst Kristy Hung, adding that Evergrande may still cut its dividend and seek spinoffs and equity placements to meet China’s “three red lines” rules for limiting debt at developers.

Evergrande shares fell 2% in Hong Kong. Its 8.25% 2022 dollar bond increased 2.2 US cents on the dollar to 88.3 US cents, the biggest gain since Sept 29. While the developer is working to address its liquidity challenges, it’s still in a “very tight cash position,” said Chuanyi Zhou, a credit analyst at Lucror Analytics in Singapore.

A particular sticking point for Evergrande has been its ability to reach deals with strategic investors who had the right to demand repayment of as much as 130 billion yuan if Evergrande didn’t win approval for a backdoor listing in China by Jan. 31. The company scrapped those plans earlier this month after a majority of its strategic investors agreed not to ask for repayment.

That prompted a consortium led by Shandong Hi-Speed Group Co., Hengda’s largest strategic investor, to sell stakes worth 23 billion yuan, according to a person familiar. About 20 billion yuan of that investment is being picked up by Shenzhen Talents Housing Group Co. while the remaining stake is being bought back by Evergrande, people familiar said. Strategic investors sold a further 10 billion yuan worth of equity to Guangzhou City Investment, one of the people said, without providing details about the investors.

Investors with equity interests of 125.7 billion yuan, including the two new state-owned firms, have entered into supplemental agreements to hold their stake as ordinary shares, the developer said in a filing. For investors holding 4.3 billion yuan of equity, where agreements haven’t been struck, Evergrande has repaid the principal in cash and repurchased shares.

The order books for the Hong Kong listing of Evergrande’s property service unit was covered on Monday, people familiar said. The guided price range of property management unit showed a higher valuation than projected, Phillip Zhong, a Hong Kong-based real estate analyst at Morningstar Investment Service, wrote in a note. Assuming a mid-point price of HK$9.13 ($1.58) apiece, the service unit spin-off is expected to generate HK$15 billion, pushing Evergrande’s projected gearing down more than 10 percentage points, Zhong added.

Evergrande didn’t reply to questions seeking further comments about its plans to pare debt. Calls to the headquarters of Shandong Hi-Speed, Shenzhen Talents Housing and Guangzhou City Construction went unanswered on Sunday.

Shandong Hi-Speed’s insistence on getting its money back has stood in stark contrast to other Evergrande investors. That may in part be because Shandong Hi-Speed isn’t part of the developer’s supply chain, like most other investors, who rely on Evergrande for revenue.

Property companies like Evergrande play a key role in China’s debt market. A high-level meeting presided over by Vice Premier Liu He over the weekend stressed implementing “regulatory and local responsibilities” when it comes to tackling bond risk. The comments suggest Beijing could hold local governments accountable if debt risk blows up in their provinces and municipalities.

With most of Evergrande’s important strategic investors for its property unit now confined to its home province of Guangdong, the company’s debt challenges have become more of a local risk than a national one, said William Ping, managing director at Peaceful Investment Co.

“With jobs and growth for the province at stake, the local province may have the final say over what happens,” Ping said. It “is a win all around, expect for investors and the market economy because now Evergrande may believe that it is indeed too big to fail.”

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